A number of large pension funds
and insurance groups have also
elected to exit hedge funds due
to performance and fee related
reasons. MetLife, the US insurer, announced it would redeem

$1.2 billion out of its $1.8 billion
in hedge fund holdings, while
American International Group
(AIG) said it would hoist $4.1
billion from external hedge funds.

Cost-sensitive pension funds have
also fired warning shots. NYCERS,
New York’s public sector pension
plan, followed in the footsteps of
the California Public Employees
Retirement Scheme (CALPERS)
and jettisoned hedge funds citing
poor performance.

Whether this is simply a case
of these investors making re-al-locations elsewhere or building
up their in-house investment
operations is difficult to ascertain.

“There are a handful of large institutional investors, including pension funds, taking their asset management in-house and establishing
their own fund management teams.

We are not seeing a massive shift
but there is definitely a trend in the
internalisation of asset management among the biggest investors
in the alternatives space, especially
private equity and real estate. We
are also noticing some investors
taking asset allocation in-house. In
other words, they are not managing
money per say but hiring managers
to execute their strategies. This is
being managed through a combination of co-mingled funds or
segregated mandates,” says Daron
Pearce, head of asset servicing for
EMEA at BNY Mellon.

Cost factor

Some believe internal asset man-agement is no longer the pedigreeof only the biggest investors. “Theperformance fee has dropped – butfractionally. Analysis by DeutscheBank found hedge fund man-agement fees averaged around1.63%, while performance feeswere at 17.85%, a slight fall from18.03% in 2015. It is not just hedgefunds facing fee pressures. A BNYMellon study found 62% and 63%of investors were looking to lowertheir private equity and hedge fundfees respectively over the next 12months. Other investors are goingone-step further and assessingwhether it was possible to launchasset management businesses in-house.

Big outflows

Some large institutional investors
have in-house asset management
teams already, but it appears to be
a growing trend. An Invesco study
of sovereign wealth funds (SWFs)
found 34% internalised their
global equity allocations in 2015,
compared to 26% in 2013. Global
bond allocations were internalised
at 57% of SWFs, compared to 52%
in 2013. 42% of global real estate
allocations were done in-house by
SWFs, a massive rise from 26% in
2013. Equally, a number of SWFs,
particularly those whose revenues
are correlated to commodity export
prices, are withdrawing huge sums
of money from third party asset
managers. SWFs, according to JP
Morgan analysis in early 2016, will
comprise the bulk of the predicted
$25 billion in hedge fund outflows
this year.

Institutional investors have made it no secret that they are frustrated with a number of
their external asset managers’ performance. Many large investors are
now looking at different options by
which to make returns with some
seeking to by-pass the traditional
asset allocation route and setting
up their own internal asset management practices.